A cert petition was filed earlier this week in connection with an Indiana Supreme Court case. National Wine & Spirits, Inc. v. Ernst & Young, LLP, No. 12-1305 (U.S. Apr. 29, 2013). This case involves an alcohol distributor that hired Ernst & Young (E&Y) to provide auditing services, and their agreement contained an arbitration clause. An employee of the distributor committed theft, and the distributor believed that E&Y negligently failed to discover the employee’s wrongdoing. The distributor commenced an arbitration proceeding, and the arbitration panel found E&Y negligent and also that the distributor was comparatively negligent in failing to discover the wrongdoing.
The distributor, however, believed that E&Y engaged in deception because the documents E&Y produced during the arbitration were allegedly misleading and caused the arbitration panel to attribute fault to the distributor. The distributor then filed an action in state court, alleging E&Y had engaged in deception in connection with the documents produced at the arbitration. The Indiana Supreme Court ultimately held that issue preclusion bars relitigation of this deception claim; the arbitration panel already considered the veracity of the documents in making its decision.
The distributor filed a cert petition earlier this week, arguing that the Indiana Supreme Court should not have addressed the affirmative defense of issue preclusion because the deception claim fell within the scope of the arbitration agreement.
At first glance, the distributor’s argument seems to have some merit. In a typical case, if a claim is subject to arbitration and has never been arbitrated before, the arbitrators and not the court, should address defenses to the claim. However, this fact pattern does not involve a typical claim subject to arbitration. The distributor’s deception lawsuit was a thinly-veiled attempt to ask a court to vacate the arbitration award. The distributor could have relied on section 10 of the Federal Arbitration Act, which authorizes a court to vacate an arbitration award “procured by corruption, fraud, or undue means,” or the distributor could have relied on a similar state statute. (State arbitration statutes tend to provide the same basis for vacating an award.) However, vacating an award requires satisfying a challenging standard, and instead of asking a court to vacate the award pursuant to an arbitration statute, the distributor filed an action in state court against E&Y for deception. Courts should not allow thinly-veiled, collateral attacks on an arbitration award to circumvent application of arbitration statutes.